Why They Heart Keynes

11 March 2009 at 1:26 pm 11 comments

| Peter Klein |

Luigi Zingales offers Straight Talk on Keynes (via Casey Mulligan):

Keynesianism has conquered the hearts and minds of politicians and ordinary people alike because it provides a theoretical justification for irresponsible behavior. Medical science has established that one or two glasses of wine per day are good for your long-term health, but no doctor would recommend a recovering alcoholic to follow this prescription. Unfortunately, Keynesian economists do exactly this. They tell politicians, who are addicted to spending our money, that government expenditures are good. And they tell consumers, who are affected by severe spending problems, that consuming is good, while saving is bad. In medicine, such behaviour would get you expelled from the medical profession; in economics, it gives you a job in Washington.

Three comments: First, the “hangover” metaphor, while not exactly accurate, is an effective way to communicate the basics of the Mises-Hayek malinvestment theory of the business cycle. Use it! Second, Zingales’s description applies equally well to the 1930s and 1940s, when the Keynesian consensus emerged. It’s important to remember that massive deficit spending to “cure” the Depression began with Hoover and Roosevelt in the early 1930s, long before the General Theory appeared. Keynes’s book did not propose a new direction for economic policy; it provided an allegedly scientific rationale for policies already in place, policies government officials were eager to defend and protect. (The use of expansionary fiscal and monetary policy to increase output had long been derided by serious economists as nonsense, as the domain of “monetary cranks” and other snake-oil  salesmen).

Third, the Keynesian delusion afflicts not only policymakers, but professional economists as well. I’ve long suspected that the appeal of Keynes to people like Krugman and DeLong is ultimately based on aesthetic, not scientific, grounds. Deep in their hearts, they just don’t like private property, markets, and individual choice. They don’t think ordinary people are capable of making wise decisions and think they, the elites, should be in charge. They resent the fact that most people don’t want their lives controlled by liberal intellectuals. Technical arguments about the effectiveness of monetary and fiscal policy, the relationship between aggregate demand and output, the experience of the 1930s, and the like are really beside the point. For Keynesian economists, the belief that markets are naturally unstable in the absence of government planning is a matter of faith.

Entry filed under: - Klein -, Austrian Economics, Classical Liberalism, Myths and Realities.

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11 Comments Add your own

  • 1. Jason Briggeman  |  11 March 2009 at 2:49 pm

    I don’t like the hangover metaphor, because it invites anti-market types to suggest a 12-step program, i.e., to ask “Why don’t we just stop drinking?”

  • 2. Keynesians hate freedom at catallaxyfiles  |  11 March 2009 at 3:24 pm

    […] is being polite. Peter Klein is less so. the Keynesian delusion afflicts not only policymakers, but professional economists as […]

  • 3. dgerard  |  11 March 2009 at 4:03 pm

    The Meltzer commentary on that page is quite refreshing.

    http://www.economist.com/debate/days/view/280

  • 4. David  |  11 March 2009 at 7:12 pm

    how do you make the claim the Keynesian economics tells consumer that saving is bad???

  • 6. Acerca do “consenso keynesiano” « O Insurgente  |  12 March 2009 at 5:28 am

    […] Acerca dos comentários de Zingales, leiam também o que escreve Peter Klein, […]

  • 7. Bob Layson  |  12 March 2009 at 11:50 am

    The true stimulus to produce is the output of other, non-competing producers (see the work of W H Hutt) being used to bid, via money, for ones own products. Spending is not the heart of the matter. If prices and product are right then spending will take care of itself.

    Money is not demand even though money is used in demanding. Money makes for money prices and more money makes not more demand but merely higher prices.

  • 8. Jason  |  30 March 2009 at 4:35 am

    What about the prescription that governments should run surpluses during good times? It is standard Keynesian fare as well, but something that politicians routinely ignore. The past 8 years tell us that you don’t need any Keynesian economists at all to get governments to be irresponsible with their spending.

    Wouldn’t the country have done much better if THAT part of Keynesianism was followed?

  • 9. Peter Klein  |  30 March 2009 at 8:45 am

    Jason, even more to the point, those economists who advocate counter-cyclical policy virtually always favor a particular pattern: during a recession, increase government spending, but never cut taxes; during a boom, increase taxes, but never cut government spending. The net effect is to increase the government’s budget during any phase of the cycle.

  • […] Louis Zingales provides a concise explanation of why Keynesianism is so popular, despite its theoretical and empirical failings: Keynesianism has conquered the hearts and minds of politicians and ordinary people alike because it provides a theoretical justification for irresponsible behaviour. Medical science has established that one or two glasses of wine per day are good for your long-term health, but no doctor would recommend a recovering alcoholic to follow this prescription. Unfortunately, Keynesian economists do exactly this. They tell politicians, who are addicted to spending our money, that government expenditures are good. And they tell consumers, who are affected by severe spending problems, that consuming is good, while saving is bad. In medicine, such behaviour would get you expelled from the medical profession; in economics, it gives you a job in Washington. […]

  • 11. Murali  |  24 January 2012 at 2:29 am

    These finance guys are funny. They teach that a large institutional investor is better than an indiviidual because they can collect information and monitor managers more efficiently. And when comes to governments ability to do the same as a collective action, than individuals inabliltiy to have full information, they dismiss it.

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